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Nanosphere Doubles Q1 Revenue Atop Flat Loss; Says Recall Has Not Affected Finances

Nanosphere's decision in February to recall some of its Verigene warfarin-sensitivity assay cartridges did not materially affect the firm’s first-quarter earnings, and the company remains on target to meet its year-end financial goals, Nanosphere officials said during an earnings call last week.
“We did not put out a press release on this because it's not a material event at all and it did not affect us materially in the first quarter, [and] it certainly won’t affect [us going] forward in the second quarter [or] any point beyond that,” Nanosphere CEO William Moffitt said during a call announcing the company's earnings for the three months ended March 31. 
However, Moffitt acknowledged that as a result of the recall, the company did have to stop taking on new customers for the warfarin assay, which kept it from meeting its goal of signing on 30 new customers by the end of the quarter.
Since launching the warfarin test last year Nanosphere has shipped 25 Verigene systems to customers for validation, company officials said during the call. Nanosphere placed 12 instruments in the fourth quarter of 2007 and 13 in the first quarter of 2008.
The warfarin sensitivity assay became the first gene-based test to receive clearance from the US Food and Drug Administration last September. The Warfarin Metabolism Nucleic Acid Test runs on the company’s Verigene platform and “detects some variants of both CYP2C9 and VKORC1 genes, the FDA said in a statement announcing the test’s approval [see PGx Reporter 09-26-2007]. 
But five months later the company recalled eight lots of its warfarin metabolism nucleic acid-test cartridge in an FDA-designated Class II recall, which means that the problem with the device may cause temporary or reversible health problems, but there is a small chance that the problem will cause serious health problems [see PGx Reporter 04-23-2008]. 
According to Moffitt, in early February Nanosphere noticed that a warfarin CYP2C9*2 mutant capture signal on a single cartridge was higher than it should have been. This caused the company to compare this aberrant cartridge with a small batch of cartridges it had retained, and these retained batches did not display the same problem.
At this point, while Nanosphere could have dismissed the problem as an anomaly, the company decided to investigate further to ensure that the fault with the single cartridge was not a more widespread issue. “In the early days of a company like this — and frankly, in this company at any time — we are going to make sure we have got the highest quality out there. You don’t ignore things like that,” Moffitt said.

“In the early days of a company like this, and frankly, in this company at anytime, we are going to make sure we have got the highest quality out there. You don’t ignore things like that.”

The company decided to initiate a recall, to get the cartridges back and test them for the problem. In doing so, Nanosphere discovered “that there was a manufacturing process step that as [it] scaled [up] needed an adjustment,” Moffitt said during the call. “We made the adjustment, we went through, we validated it, [we] commenced with... GMP and QSR requirements, documented it, and moved on.
“You never want to be seen as minimizing anything that has to do with your product performance. So, I would not want to be seen as minimizing, but it wasn't material and strictly a requirement in order for us to get the product back,” he explained.
The Northbrook, Ill.-based molecular diagnostics firm more than doubled its first-quarter revenues to $576,016 from $269,903 in the first quarter of 2007. Product sales for the quarter were $303,404 compared to $46,645 in the comparable period of 2007, while grant and contract revenue increased to $272,612 from $223,258.
Net loss remained flat year over year at $8.7 million. In the first quarter of 2007, Nanosphere was privately held. The firm went public in November, raising $102 million in net proceeds from the sale of 8,050,000 shares of common stock at $14 apiece.
The company’s R&D expenses increased 18.4 percent year over year to $5.8 million from $4.9 million, while SG&A costs rose 54.5 percent to $3.4 million from $2.2 million.
Nanosphere finished the quarter with $104.2 million in cash and cash equivalents.
Expanding Verigene
In its most recent filing with the US Securities and Exchange Commission, Nanosphere said that in the next 36 months it plans to expand the use of its Verigene system by filing tests for FDA clearance in cystic fibrosis, herpes, cervical cancer, respiratory illness, recurrent prostate cancer, and cardiovascular disease.
Two of these tests — one for cystic fibrosis and another for respiratory illness — will be submitted to the FDA sometime this year, company officials said during the call. Additionally, clinical trials are currently being planned for its troponin assay, which is designed to allow physicians in emergency rooms to rapidly diagnose cardiovascular disease. The company expects to begin marketing this test in mid-2009.
In October, Nanosphere received FDA clearance for a hyper-coagulation assay, and according to Mike McGarrity, Nanosphere chief marketing officer, uptake of the product was strong in the first quarter.
“While it's still relatively early to draw conclusions, cartridge utilization by our validated customers is greater than we anticipated for our hypercoag test, and our warfarin customers are in the process of implementing pharmacogenetic programs,” McGarrity said during the call. 
Spurring Adoption
Nanosphere is also taking up the responsibility of generating clinical utility data to spur the adoption of gene-based warfarin testing, by setting up retrospective and prospective data collection efforts at hospital labs.
“There are a number of prospective large-scale clinical studies” attempting to assess the clinical utility of gene-based warfarin testing, noted McGarrity.
At the end of 2006, Medco and Mayo clinic launched a 1,000-patient study to evaluate the clinical and economic value of incorporating genetic testing into warfarin therapy [see PGx Reporter 12-06-2006]. And Harvard-Partners Center for Genetics and Genomics has a similar effort ongoing [see PGx Reporter 11-15-2006].
“While we are confident that these studies will yield compelling results and support our efforts, we are also committed to helping our customers [gain] greater awareness and expand our programs on a local basis by providing assistance with clinical studies and education.”

Nanosphere is hoping that these data collection efforts with regard to warfarin testing “will lead to greater awareness for value of warfarin metabolism testing and increased utilization by our customers,” McGarrity said.

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